The government is not a household, and shouldn’t be run like one

at 12:19 PM ET, 04/15/2011

It’s increasingly well understood — at least among the tiny slice of Americans who read wonkish economic blogs — that thinking about the government as a very big household that happens to employ an army is a bad thing. When economic times are good, households should spend and invest more, while government should spend and invest less. When they’re bad, households need to cut back, and the government needs to step in. But as Karl Smith says, that’s not the only place where the analogy breaks down. Another — and one that’s increasingly relevant — is “not realizing your personal control over spending versus revenues is essentially the exact opposite of the governments control over spending versus revenues.” He continues:

Most middle class folks can cut back on their spending with relative ease. They probably won’t get sick, malnourished or injured from exposure as a result of spending cuts. What this means is that if revenues are running higher than spending – a necessary condition for building up debt – the most obvious choice is to cut spending. Therefore, as a rule of thumb people develop the notion that debt comes from living beyond your means...to the government, the exact opposite is true.
It is much easier for the government to raise revenue than to cut spending. Moreover, most of the movement in the deficit is tied to movements in revenue, not movements in spending. Thus the exact same reasoning that leads you to associate debt and spending in your personal life should lead you to associate debt and revenue for the government.

That’s not to say the government can’t spend too much, or that there’s no reason to prefer spending cuts to tax increases. But what’s happened over the past few years is that the deficit has increased primarily because revenues — for reasons related to both tax cuts and the financial crisis — have plummeted. People, however, have looked at the increase in the deficit and assumed it was the product primarily of new spending, as most people’s incomes don’t fluctuate very much and so big debts tend to imply big expenses.

 
Read what others are saying

    Most Read: Business

    DJIA
    -0.48%
    NASDAQ
    -0.4%
     Last Update: 4:15 PM 05/06/2015(NASDAQ&DJIA)

    World Markets from      

     

    Other Market Data from      

     

    Key Rates from